The Scottish Government is to issue its first ever bonds - but what are they? How do the bonds work?

First Minister John Swinney said the move would help fund “key infrastructure” projects.

The issuance will be the first in a planned £1.5 billion bond programme over the life of the next parliament, subject to factors such as market conditions and borrowing requirements, as well as the outcome of the Holyrood election. It comes after two global credit rating agencies awarded Scotland the same ranking as the UK.

Moody’s rated the Scottish Government as Aa3 while S&P Global rated it as AA, both identical to the UK’s sovereign rating. The Moody’s report, however, included independence as a possible factor that could see Scotland’s credit rating downgraded.

But what exactly are bonds and how will they work?

What are the Scottish Government bonds? How will they work?

Essentially, the bonds allow the government to raise money by borrowing from investors.

READ MORE: Scottish Government to issue first bonds after receiving credit rating update, as independence warning given

A useful way of thinking of them is as an IOU. Bonds are loans the government promises to pay back at the end of a set period, when they have "matured".

In return, those who buy bonds will get regular interest payments from the government, at a percentage rate referred to as the yield. These could be annual, providing a steady source of income for investors.

However, bond prices can rise and fall, which will have an impact on the yield.

UK Government bonds are referred to as gilts, which has led to their Scottish equivalents being nicknamed “kilts”.

How will the Scottish Government use the bonds?

SNP ministers say being able to issue bonds will allow further funding of infrastructure investment, with Scotland’s rating higher than countries such as Spain, Italy and Japan.

In reality, bond sales will contribute a very small part of the Scottish Government’s overall budget due to limits imposed by Westminster, but they have a symbolic value.

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Then first minister Humza Yousaf in 2023 commissioned initial work, with the goal of issuing bonds before the end of this Scottish Parliament session.

That came after advisers in the Scottish Government’s investor panel recommended making bonds available to the market as a means of raising Scotland’s profile and attracting investment.

Angus Macpherson, chairman of financial advisory firm Noble and Co and former co-chair of the investor panel, said he was “greatly encouraged by the progress the Scottish Government is making in achieving a credit rating to raise Scotland’s profile in the international capital markets”.